Home Financial Advisor Episode #514: Liz Simmie, Honeytree – A Quantamental Method to ESG – Meb Faber Analysis

Episode #514: Liz Simmie, Honeytree – A Quantamental Method to ESG – Meb Faber Analysis

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Episode #514: Liz Simmie, Honeytree – A Quantamental Method to ESG – Meb Faber Analysis



Visitor: Liz Simmie is the co-founder of Honeytree Funding Administration, an asset administration agency based mostly in Toronto, Canada.

Recorded: 12/13/2023  |  Run-Time: 52:11


Abstract:  In immediately’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which can be stakeholder ruled, function pushed, and make a web constructive impression on the world. Then she shares some sizzling takes on the state of each ESG and lively administration. As we wind down, Liz talks concerning the means of launching an ETF with our associates at Alpha Architect and shares recommendation for anybody desirous about launching one themselves.


Feedback or options? All for sponsoring an episode? Electronic mail us Suggestions@TheMebFaberShow.com

Hyperlinks from the Episode:

  • 1:15 – Welcome Liz to the present
  • 1:46 – Launching BEEZ
  • 7:11 – Discovering accountable progress and being ‘quantamental’
  • 10:19 – Lively administration and index hugging
  • 15:14 – Predominant elements that filter out sectors and firms
  • 21:30 – Overview of stakeholder governance
  • 25:16 – How energy balances inform Liz’s funding philosophy
  • 34:56 – Place sizing
  • 38:44 – What it’s like to start out an ETF
  • 44:24 – Episode #318: Perth Tolle, Life + Liberty Indexes
  • 46:23 – Beliefs Liz holds her that her friends would disagree with
  • 49:11 – Liz’s most memorable funding
  • Be taught extra about Liz: Honey Tree Make investments; X

 

Transcript:

Welcome Message:

Welcome to The Meb Faber Present, the place the main target is on serving to you develop and protect your wealth. Be part of us as we focus on the craft of investing and uncover new and worthwhile concepts, all that will help you develop wealthier and wiser. Higher investing begins right here.

Disclaimer:

Med Faber is the co-founder and Chief Funding Officer at Cambria Funding Administration. Resulting from trade laws, he is not going to focus on any of Cambria’s funds on this podcast. All opinions expressed by podcast individuals are solely their very own opinions and don’t replicate the opinion of Cambria Funding Administration or its associates. For extra data, go to cambriainvestments.com.

Meb:

Hey, hey everyone. A enjoyable present once more immediately. Our visitor is Liz Simmie, co-founder of Honeytree Funding Administration, which just lately launched an actively managed ESG-focused ETF ticker BEEZ. In immediately’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which can be stakeholder-governed, purpose-driven and make a web constructive impression on the world. And she or he shares some sizzling takes on the state of each ESG and lively administration. As we wind down, Liz talks concerning the means of launching an ETF with our associates at Alpha Architect, and shares recommendation for anybody desirous about launching one themselves.

Please get pleasure from this episode with Liz Simmie.

Liz, welcome to the present.

Liz:

Thanks for having me.

Meb:

The place do we discover you immediately?

Liz:

Toronto, the nice white north up right here.

Meb:

I heard an A in your diction earlier. Are you initially a Canadian?

Liz:

Yep, born and raised in Toronto my entire life. I’ve by no means gone anyplace else. Truly I went to Montreal for college after which got here again and can by no means depart this nice metropolis and nation.

Meb:

Superior. I find it irresistible up there. We’re going to speak about loads immediately. One of many matters listeners, which you most likely actually need to stick round for is this idea of beginning ETFs. I get a whole lot of questions. Day-after-day individuals need to begin an ETF, they obtained an thought for an ETF. We’re going to speak about somebody who’s performed it very just lately, placing out their first fund in November with our loopy pal, Wes Grey and crew. So we’ll undoubtedly get into slightly little bit of that later. However I need to discuss slightly bit about you, your concepts, your course of. Give us slightly background.

Liz:

I’ve an economics diploma, economics and historical past diploma, and I wished nothing to do with this nice trade of ours as a result of I wished to make the world a greater place and do cool stuff. So I ended up in market analysis, so client insights, so testing model technique for PNG and massive financial institution, new account, all these cool analysis tasks, quantitative and qualitative.

After which my dad began an rising supervisor. So my dad’s a bootstrapped US fairness supervisor based mostly in Toronto, they usually had this third man who was American and he obtained divorced. So whenever you get divorced and also you’re right here on a spousal visa, you get despatched again to the US, which it’s what it’s. So my dad wanted a 3rd particular person to come back in. I begrudgingly mentioned, “Certain, it feels like an attention-grabbing thought,” having actually no idea of the funding trade past slightly little bit of publicity right here and there.

And I used to be fortunate. I joined a bootstrapped dividend progress fairness supervisor at about 10 million AUM and was there till about 1.5 billion AUM after which left to start out Honeytree. And to be tremendous clear, it’s ’trigger my dad was a founder. There’s an entire pile of privilege in there, but when I had gone the standard path to be a portfolio supervisor at an even bigger store or a pension or no matter, it’d be a really totally different expertise that wouldn’t essentially set you as much as going to bootstrap your individual rising supervisor.

The agency’s referred to as Bristol Gate for people who need to google issues. We launched ETFs in 2018, and I had met my co-founder on the identical time, and we thought all these of us are attempting to launch ESG methods they usually’re all lacking what we expect the tip shopper for these ESG merchandise need. And this, to be tremendous clear, is lengthy solely fairness universe, not alter hedge funds or something like that.

And so in 2018, we set out, which is identical 12 months we launched the ETFs up right here. 2018, we got down to discovered Honeytree. We have been registered in 2019. It takes loads longer up right here to get authorized by the regulators. We began our observe information in 2019 for our world fairness technique. We did that in order that we didn’t must launch a automobile off the bat as a result of autos price some huge cash they usually take a whole lot of effort to distribute. They take a whole lot of consciousness and all these things.

Anyhow, we had all the time meant to launch a retail automobile. We didn’t ever desire a personal fund. Lengthy-only boring methods undoubtedly don’t make sense in personal funds in Canada or the US and we thought we’d have a Canadian automobile first. So we went round. There’s not as many white label choices up right here, and those that they’ve are, we’ll name it not nearly as good, however we thought we might launch a subadvised Canadian automobile up right here.

After which we met Wes. And Wes determined that we wanted to get ourselves right into a US ETF. After which we realized, wait a second, US, the US market’s larger, there’s simply as a lot if no more demand for ESG merchandise. One main distribution distinction between Canada and the US is in Canada, no person cares that we’re girl owned. We’re the fifth or sixth public markets asset supervisor owned by girl in Canada. That’s what number of there are up right here. So there’s no supervisor range initiatives up right here institutionally or from advisors, whereas everyone is aware of within the US, a number of states have numerous supervisor initiatives at their pensions and issues like that.

So we thought, if we’re going to do that automobile, let’s do it within the US, let’s do it as an ETF and let’s do it with Wes. And growth, November seventh, we launched our first ETF and the ticker is BEEZ, B-E-E-Z, ’trigger branding issues and it’s a US massive cap and it’s targeted on accountable progress.

So it’s the identical funding thesis we’ve been engaged on our total agency historical past, which is responsibly rising corporations, stakeholder-governed, purpose-driven corporations who care for their stakeholders outperform in the long term.

What’s actually attention-grabbing is we didn’t like several of the present ESG frameworks. We thought, and I might discuss for 10 years concerning the issues with current ESG and funding frameworks, however we threw out a whole lot of the scores and current fashions and current assumptions about ESG. And we took what my dad had constructed, a quantum psychological mannequin for Bristol Gate and we introduced in ESG knowledge on equal footing with the monetary knowledge all through the complete course of.

What we’re identified on is ESG integration. So full ESG integration, which implies we deal with ESG knowledge as basic firm knowledge in safety choice, not right here’s our monetary mannequin over right here on one aspect and right here’s our ESG mannequin and evaluations over right here on different aspect. We deal with the ESG knowledge that we use as basic firm knowledge when selecting these corporations for the portfolio.

Meb:

So let’s dig in on the method as a result of various the phrases you used might imply a whole lot of various things. ESG means a whole lot of various things to a whole lot of totally different individuals. So let’s hear slightly bit about y’all’s course of. You have got a pleasant deck. If we are able to embody it within the present notes, listeners, we definitely will on the method, which I feel could be very useful. However why don’t you stroll us by way of it. How do you guys discover accountable progress? What does that imply? And once we hit a few of these phrases, let’s attempt to give y’all’s interpretation of what you suppose it means to you as properly.

Liz:

So quantum psychological means we’re not purely basic and we’re not purely quant. We use each processes. And for people on the market who usually are not deeply steeped in fairness, basic fairness land, basic is taken into account deep dive qualitative analysis and quantitative analysis into an organization versus quant processes are usually extra quantitative, much less deep dive into an organization sort measures. And there’s many alternative managers who do each. We do each.

And what that appears like in our course of is we begin with the entire index, no matter index that may be. On this case for the ETF, it’s the US. And we run 25 qualification standards. And most of these are quantitative knowledge factors. We don’t do a fancy-schmancy predictive advanced quant like a few of other people may suppose quants are. However we have now 25 qualification standards that’s making an attempt to get us right down to a consideration set about 50 corporations.

And what that qualification standards appears like is there’s some practical stuff. Can we purchase it in custody in North America 5 billion minimal market cap? Some monetary. If we have now a dividend, it must be rising funding above funding grade credit standing. Then there’s a whole lot of conventional ESG exclusions. So conventional ESG exclusions are variety like the unique spiritual investor exclusion as a result of ESG has its roots in spiritual investing. So no weapons, no weapons, no playing. We don’t exclude pot, however no pot corporations make our display. We exclude fossil gasoline manufacturing.

Meb:

That’s sacrilege up there in Toronto. Man, no marvel you’re launching this within the US. There’s all of the traditional Canadians, man, the mining and vitality, they’re most likely identical to, “Liz, what are you speaking about?”

Liz:

Effectively, it makes it very attention-grabbing up right here as a result of we have now all the main pensions are deeply dedicated to ESG and deeply dedicated to vitality funding. And I wish to level out to folks that the vitality corporations are actually good at DEI and reporting way more so than tech corporations and asset managers, however that’s a special story. However we exclude fossil gasoline.

There’s a few causes we exclude fossil gasoline. We by no means held an vitality firm at Bristol Gate as a result of vitality corporations are slightly too cyclical to have excessive constant dividend progress. So from becoming in into qualifying and stepping into the portfolio, they’re more likely to fail anyway. So it’s sort of only a bit simpler to display them out ’trigger they’re not going to make it. We additionally don’t have any renewable vitality corporations in our portfolio.

Meb:

Effectively additionally, I imply whenever you transfer from a universe of 1000’s right down to 50, you’re invariably going to kick out all types of issues and areas and sectors and industries, whether or not it’s from the broad standards, whether or not it’s from the secondary form of standards as properly. In order that’s the entire level of lively administration. You desire a concentrated portfolio as a result of in the event you’re charging greater than zero, you need it to have a look at bizarre and totally different.

Liz:

Yeah. And it’s humorous ’trigger I’ve by no means understood why of us don’t need it to look bizarre and totally different. It’s certainly one of my large points with lively administration index hugging.

Meb:

It’s quite simple. They need it to look bizarre and totally different when it’s going up. They need it to look bizarre and totally different if it’s happening and also you’re not happening. However primarily it creates a bizarre precept agent drawback as a result of a whole lot of the big asset managers, as soon as they get to scale, after you have 10, 50, 100 billion, 500 billion, you don’t need to look that totally different as a result of there’s solely draw back danger. The cash is already captive. And we all know that cash as soon as it’s sitting someplace, doesn’t wish to go anyplace until it will get abused or does very poorly. When you have a look at a whole lot of the old fashioned hedge funds too, their early years the place they did 150% or these huge returns and now all of them do 7% with 10% volatility.

Liz:

They usually’re all chasing FANG shares and it’s like, what are you doing? However the index hugging factor, individuals like to choose on ESG for index hugging. Lively is index hugging all the way in which. I imply, I’m an enormous believer that a whole lot of lively underperformance comes from not taking dangers and never having excessive lively share and index hugging and making a bunch of silly choices as a part of that.

However you’re proper, our qualification course of kicks out entire sectors. Once we run our world, we exclude dictatorships in our world fairness technique. So we’re okay not having exposures to a bunch of issues, whether or not they be sectors or nations or sort of corporations.

In our non-traditional ESG qualification standards, we have a look at board range past gender. So we embody racial range of board members, 33% or extra. So we gained’t have a look at an organization who has not discovered the best way to put a pair token range hires on their board but, principally as a result of in the event you haven’t discovered how to try this from a governance perspective, you’re not very competent.

Meb:

I imply, does that display alone kick out half of the universe it seems like?

Liz:

No, individuals are a lot … Within the US, particularly the US boards are fairly numerous. Canada’s fairly unhealthy, however clearly we’ve obtained none of these within the ETF. However even once we began, if we had a 40% bar, it could kick out a number of of us. It’s humorous ’trigger actually it finally ends up kicking out cool tech renewable vitality boards that you just … not typical stuff that we maintain in our portfolio like boring industrials and boring retailers and semiconductors as a result of they’ve all been engaged on these things for some time. So it doesn’t kick any of these out.

Funding grade credit standing may kick out extra corporations. When you have a look at the final cohort of our qualification course of, there’s most likely extra boards that fail or extra corporations that fail on funding grade credit standing or fraud points and issues like that, lawsuits, than on the board range. Why? ‘Trigger everyone’s slowly figuring it out. And to be tremendous clear, we’ve elevated that 33% from 30, so finally it’ll be 35 and we have now to take care of the universe as it’s. ‘Trigger our objective is to get from the universe right down to a manageable consideration set that we are able to cowl from a basic deep dive perspective in essentially the most environment friendly method attainable.

And we run that consideration set as soon as yearly. So we’ve performed it 5 occasions now. So did 2018 until now and it evolves, but it surely doesn’t change that a lot. It completely spits out chubby IT, chubby industrials supplies. We by no means have any banks. We’ve some monetary stuff. We typically don’t have actual property, and we’re okay with that.

And one factor you’ll discover, in the event you have a look at our portfolio, there’s a whole lot of manufacturing concerned corporations. And that’s the place the semis sort of pop in. It’s ’trigger these corporations who’ve needed to handle labor, handle manufacturing services, handle worker security, you’ll be able to think about there could also be slightly few steps forward of a West Coast tech firm when it comes to desirous about their workers and reporting ESG stuff and employee security and issues. So it’s attention-grabbing the way it nets out.

Meb:

Yeah, I’m saying this from a podcast whose listeners are most likely 90% male. I imply, I bear in mind giving a speech in New York to Quantopian crew they usually did a stay viewers and it was like 95% male. However the enterprise capital has to me, essentially the most outsized. I imply, I feel ladies get 2% of enterprise capital {dollars}. It’s some extremely low quantity that’s nowhere close to 50. However anyway. Okay, so we’re getting slightly off-topic.

All proper, so we’re beginning with various these elements. You bought a whole lot of them. What do you suppose are the principle drivers of those that form of filter out essentially the most issues? Are there any of the 25 or so which can be significantly extra outstanding?

Liz:

Checked out it year-over-year they usually are usually, I imply clearly participation exclusions. You recognize what I might say? There’s an entire bunch they usually’re all fairly equal. And that want for dividend progress, the funding grade credit standing, the variety, the trade participation, the everyday ESG exclusions, even glass door ranking, it’s sort of simply an equal. You’d suppose it was larger in a number of the areas. Aside from shedding entire industries, it’s a really attention-grabbing sort of balanced course of.

Once we did it at Bristol Gate, it was the S&P 500, removed all of the non-dividend payers, removed everyone under funding grade credit standing, and based mostly on subsequent 12 months’s predicted dividend, we selected the highest 50 and did the elemental deep dive on these. And what we’re getting with the identical however a special course of ’trigger bear in mind, what we’re chopping out is just not, we are able to’t simply have the best dividend growers as a result of if we simply regarded on the highest dividend growers to get the ESG growers too, or the accountable growers too, we’d must sort of go slightly bit additional than the highest 50 excessive dividend growers.

And that’s why we altered or optimized this course of that my dad constructed as a result of we wished the identical issue publicity. So these excessive constant dividend growers who’re well-managed and well-governed and targeted on the long-term, we wished them, however with barely larger degree of ESG. And to be tremendous clear, in the event you have a look at the Bristol Gate ETF, it has a better ESG ranking than most ESG managers and methods on the market as a result of boring, excessive, constant sustainable dividend growers typically have excessive ESG scores ’trigger they often don’t do an entire bunch of silly stuff that will get you pushed down within the rating with controversies or behind on the occasions when it comes to board range, all this stuff that make up ESG scores.

And also you’ll discover I didn’t point out we use ESG scores as a result of we don’t use ESG scores at any half in our course of. And ESG scores, simply ’trigger I do know individuals hate ESG and scores, ESG scores are the identical as purchase/promote scores, proper? So it’s simply exterior sourced analysis {that a} portfolio supervisor can purchase or not.

And so we run that qualification as soon as yearly. That will get us to about 50-ish corporations. After which we do our basic deep dive. And what we do is we take all of the financials we did at Bristol Gate, which skews taking a look at debt capability, how conservatively they’re managing their debt, earnings progress, dividend progress, aggressive market share, and we usher in ESG knowledge and put it equally beside that monetary basic knowledge. And we purposely set up it below pillars in order that they’re equally weighted. So it’s not like, “Hey, the monetary half will get 66% weighting and the ESG half will get … ” We don’t divide it like that and nor will we simply to be tremendous complicated, will we consider measures as E, S and G. Each ESG enter that we use, we take into account basic to the corporate. And I’ll provide you with some examples.

So turnover. Turnover prices you cash. It’s an ESG measure, however the larger turnover you’ve gotten, the extra it prices to rent new individuals. Water use, if it can save you the fee that you just spend on water, it’s a monetary factor. It’s undoubtedly an ESG factor, but it surely’s tied to the operations and the prices of an organization. It’s not a separate consideration. Waste is a superb instance. It prices a number of cash to get rid of waste.

And you then get into the stuff that’s slightly extra complicated to grasp the way it’s tied to the underside line, like gender and management year-over-year, racial range and management year-over-year. So at first look, oh, that’s only a really feel good measure. Effectively, corporations that we’re searching for and that we personal perceive that the extra ladies you’ve gotten in management roles, the larger your pool of candidates it’s important to recruit from. So it really will increase the various constructive advantages to the corporate of doing this fundamental stuff that some would say is silly DEI stuff. However the corporations that we’re holding are doing it for operational and enterprise causes, not as a result of it makes them look good on a questionnaire.

We have a look at science-based targets, that are net-zero associated. We have a look at parental depart. We have a look at what knowledge we are able to discover that’s comparatively systematizable throughout the consideration set of corporations.

So if you concentrate on it, we’re taking a look at most likely, of the 50 corporations we’re doing this deep dive on, we’re taking a look at a number of the prime ESG reporters and scoring issues. So we really can run comparatively customized knowledge units throughout this 50-ish group of corporations like racial range and management year-over-year, three-year change in that, three-year change in water depth, three-year change in water use. As a result of you’ll be able to’t get it for the entire S&P 500 for instance as a result of an entire bunch of these corporations aren’t reporting that degree of knowledge but. However as a result of we’re taking a look at this type of extra superior ESG-esque pool of corporations, we’re getting all these knowledge factors that we might not be capable of purchase from an index supplier who’s promoting ESG knowledge throughout their index.

Finally, we’re constructing a excessive lively share, 25 positions, tremendous concentrated ETF of essentially the most boring, sustainably rising, responsibly rising corporations. And in a nutshell, these corporations that we’re holding perceive that the constructive impacts that they make on all of their stakeholders, so their workers, their clients, the area people, their shareholders, they perceive that the constructive impacts they make on these teams drives their backside line. So it’s not separate from their backside line. Doing good by their workers or their clients is core to their mission and core to their function.

And these corporations are based on that and it doesn’t matter what their political views are. Effectively-managed, long-term targeted corporations which can be stakeholder-governed and purpose-driven will outperform in the long term. And that’s our funding thesis and I ought to most likely outline a few of these phrases.

Meb:

Certain, let’s hear it.

Liz:

So stakeholder governance. So anyone steeped in investing has been typically educated that shareholder primacy and shareholder governance is the function of an organization. So an organization’s job is to manipulate on behalf of their shareholders and make their shareholders cash. The issue with that’s workers and clients and an entire bunch of different elements affect an organization’s skill to make cash.

So stakeholder governance, which isn’t one thing I invented, I might argue authentic governance was stakeholder governance, however that’s a extra advanced matter. Stakeholder governance is only a firm that claims, “You recognize what? Our workers and our clients and all this stuff must be thought-about in our governance and our administration processes. Why? As a result of they impression they usually’re impacted by our choices. And we’ll do higher if we’re partaking all of our stakeholders and serving to and supporting and never screwing over basically all of our stakeholders.”

So there’s tons of corporations on the market that consider in a stakeholder governance framework. So as an alternative of being our solely objective is to return returns to shareholders. That turns into simply one of many roles of the board. And so we’re searching for these corporations the place there’s proof of their metrics, no matter these metrics may be, that they’re contemplating their stakeholders. ‘Trigger you’ll be able to’t simply say you or your stakeholders are ruled and also you care about all these things identical to you’ll be able to’t say you care about range. Saying you care about range or the setting is nice, however what you really do in your enterprise and the adjustments that you just make and the outputs that you would be able to see within the enterprise let you know whether or not one thing’s caring about any of these items.

So stakeholder governance is, I feel it’s one thing firms do extra naturally. I feel it’s within the funding trade I feel a whole lot of our conventional finance concept assumes that stakeholders don’t matter. And so what you see in ESG is you see conventional monetary fashions over right here and also you see individuals making an attempt to suit all this local weather and variety into these fashions they usually don’t match as a result of the standard fashions assume shareholder primacy and shareholder governance. The one method ESG works in an organization is when its core to their operations and core to their function, not as a separate exercise on the aspect.

Our corporations usually are not doing ESG stuff to really feel good or to look good. They’re doing it as a result of it’s a part of their function and their core, and it’s how they have been all the time based and the way they’ve all the time operated. And purpose-driven is absolutely advanced as a result of it’s one thing I discovered loads about in governance coaching and in advertising and marketing, which is it’s actually troublesome to speak persistently to individuals.

And so these corporations that we’re searching for know that it’s actually arduous and know that sharing, having a shared function, getting an entire 1000’s of workers to work collectively in direction of the identical objective persistently and speaking that objective is a troublesome exercise that they as a board and a administration crew must work on. And that shared function is just not solely having a transparent function for the group, however serving to all of your workers, your whole stakeholders, your whole clients perceive why you’re there and what you’re doing makes for a extra environment friendly ship if one may need to say. When you’ve gotten disparate targets and disparate concepts in a corporation about the place one ought to go, it’s much less environment friendly, and people get confused and don’t perceive as clearly what they’re alleged to be doing.

That is all management and governance science that’s simply within the early levels of academia when it comes to quantifying and analyzing all these things. However I feel everyone can agree that if everyone’s working round with their head lower off and no person is aware of what they’re doing at an organization, it’s lowering productiveness. And the extra everyone may be on the identical web page when it comes to long-term targets, the extra effectivity that you would be able to obtain.

Meb:

As you concentrate on governance, there’s areas that you could be or might not be concerned, however you’ll be able to communicate to it. I’m considering of issues like within the US, significantly with a number of the tech corporations this previous cycle who’ve been very form of me-focused, that means like stock-based compensation that’s simply outrageous, a ton of dilution to shareholders, possibly twin shared lessons, all these kind voting issues which have gone on.

Do these play any function in any respect in your varied screens and the way do you concentrate on this push-pull story as previous as time with the stability of energy between boards and C-suite and compensation? How does that play into what y’all do?

Liz:

There’s like 100 matters there they usually’re all tremendous fascinating. I’m going to start out with a narrative. So Google again, should’ve been 2018, 2019 once we began, had two senior dudes sexually harassing an entire bunch of their workers and the board discovered this out. After which the board spent 12 or 14 months debating what they need to do with them. And the one girl on Google’s board mentioned, “In all probability we must always inform individuals and fireplace them, most likely we must always try this.” They usually all simply sat there and twiddled their thumbs.

And that is all extremely certified group of people who find themselves CEOs and on an entire bunch of boards they usually’re professionals at this, but one of many largest corporations on the earth sat there and twiddled their thumbs. After which finally they gave the fellows 50 million every and paid them off and brought about an enormous controversy with all their workers, all stuff that they may have been prevented. It’s not their fault they obtained a bunch of sexually harassing dudes. The board’s job is to rent and fireplace the CEO. And when the CEO’s not hiring and firing the dude sexually harassing of us, that’s a governance problem.

The primary time we constructed the portfolio, our world fairness technique, two of the boards had just lately fired their CEOs for sleeping with their secretaries and varied different issues. And that exhibits practical governance.

The reply to your query is what’s practical governance? Is it an entire bunch of unbiased board members? Effectively, that’s what the ESG scores would let you know is nice governance. The issue is 10 unbiased extremely certified of us don’t create good governance. Good governance is created by a governance tradition, by a shared function, by individuals really working collectively on governance points.

So you’ll be able to have good governance with bizarre compensation and all this type of stuff on the identical time, completely. However I might argue a whole lot of that large tech is poorly ruled. We don’t have any financial institution shares in our portfolio for a motive. And it’s not ’trigger they get excluded for producing fossil gasoline. However there’s a robust perception that non-independent administrators usually are not ESG. We don’t essentially share that perception. Whereas we’d desire … Clearly we search for audit committee independence for instance. That’s certainly one of our necessities. We gained’t spend money on an organization. However that ship’s sailed. Everyone is aware of the best way to make their audit committee unbiased at this level and there’s no magic bullet on compensation.

And simply going again to CEO compensation, individuals hear loads about CEO compensation, and there definitely are a whole lot of extremely paid CEOs. The issue is we don’t have any good measures proper now to really assess CEO pay. And what I imply is what we’re typically utilizing proper now’s common employee pay to CEO pay. So it actually relies on what trade and which set of knowledge that you just’re utilizing. And what issues extra is, to me, who cares concerning the CEO pay. What issues extra is the baseline worker pay. What issues extra is pay fairness. So in the event you’ve obtained a person and a girl in senior management roles and the lady simply because she’s had decrease incomes all through her profession is getting paid much less, and that is stuff that corporations can repair.

What issues is Walmart’s base pay versus one other retailers base pay, not essentially the ratio of what their executives make versus what that pay is. As a result of an organization paying a low quantity to executives doesn’t naturally imply it’s doing higher for the world. And executives price a number of cash. So it’s a extremely attention-grabbing, messy matter, however the way forward for ESG is us with the ability to get this knowledge on the proper granularity.

We have already got exec comp. So exec comp clearly was already all the time there. It’s just a bit extra standardized in ESG reporting now. What we’re quickly going to have is management comp divided by group, proper? So we’re going to have girl in management’s comp, males in management’s comp even damaged down by racial range as a result of the way forward for ESG reporting is the Division of Labor range knowledge being put in monetary statements as required disclosure, and that features gender and race by degree, and that’s going to finish up together with turnover. It’s going to finish up together with pay and pay fairness, together with bonuses. It’s very attention-grabbing as a result of wage versus bonuses will get very messy when it comes to pay fairness. It’s going to be a shock to everyone and everyone’s going to hate it apart from the businesses which were reporting this already.

Meb:

How do you guys take care of shifting sands over time? Not on issues which can be as apparent possibly as range on boards, however issues like, hey, we’re going to exclude, you talked about hashish, alcohol, like opioids. I don’t know, a decade in the past individuals have been like, “These are the very best factor ever.” And now they’re like, “Oh my god, these are accountable for lots of misuse and issues like …” I imply we wrote an investing paper some time again on the investing pyramid, however the instance we gave was the meals pyramid from my youth, which is such as you actually ought to simply be consuming pasta and frosted flakes and muffins. Your base of meals ought to be carbs and the very last thing you need is fat or protein, no matter it was, and immediately it’s inverted.

In order information change and shifts, how do you guys take care of that? I do know you mentioned it’s an annual course of, however do you form of replace these standards and concepts as they grow to be extra accepted? How do you concentrate on a few of these matters?

Liz:

I wish to level out virtually every thing we do kills individuals and people within the ESG aspect of the stuff give particular sectors a cross, like prescription drugs for instance. We’ve no pharma corporations in our portfolio. We’ve a whole lot of well being tech although, like medical gear and issues like that. One of many causes we have now no pharma corporations is ’trigger all of them have worth fixing scandals. And so no matter their skill to kill of us with their product or no matter, which is clearly don’t even get me began on the opioids and the Sacklers as a result of that could possibly be an entire different podcast, the value fixing, which is they only, I don’t know, all of them simply determined to do that previously 5 years, all of the executives simply working for costs or no matter after which the large congress factor.

However right here’s what occurs in ESG and impression, and I say ESG and impression as a result of impression scores occur in public markets too. Generally individuals once they discuss impression investing, it’s simply personal markets, however for essentially the most half we have now impression scores on these corporations. The issue with impression scores is they often are based mostly on the SDGs, so the sustainable improvement targets that are developed for nations by the UN.

So an organization to be impactful in keeping with this framework, and I’ve obtained an entire bunch of air quotes right here for people who find themselves not watching my try to framing the sarcasm, to be impactful an organization wants to deal with an SDG. And so what occurs is all of the pharmaceutical corporations get 100% impression ranking as a result of they make a drug that’s serving to individuals. They don’t get any destructive ranking for worth fixing.

And so we might not be solely involved concerning the opioid disaster. We’d be involved with the entire Sackler governance shit present catastrophe that was them creating the opioid disaster. For anyone who has not learn the lengthy, I feel it’s the Atlantic piece on the complete historical past of the advertising and marketing behind that, ’trigger once more, the meals pyramid that you just talked about, have you learnt who paid for that? It was not the FDA. It was the cereal corporations simply to be tremendous clear. There’s an entire bunch of analysis that company pursuits … That is certainly one of my passionate areas. Tariq Fancy was the previous CIO of BlackRock, ESG at BlackRock, and he stop and he went on an enormous, large talking tour of the world to say, “Firms don’t make an impression. Solely governments and nonprofits could make an impression.”

However the Sackler household in an organization by way of an entire bunch of selling choices and a necessity to earn more money began and created an enormous destructive impression far past their product, proper? With all of the lies and the paying off docs and continued points, they created a destructive impression that no authorities or nonprofit might cease.

And so the reply is corporations make large, large impacts, constructive and destructive. What we’re making an attempt to purpose for on this portfolio is corporations making a web constructive impression. So corporations who’re lowering their destructive externalities as a result of they price cash, they harm individuals, they appear unhealthy from a PR perspective, an entire bunch of explanation why you would cut back your destructive impression on the world whereas rising your constructive impression. So whether or not that’s higher respectable pay, safer work circumstances, higher high quality merchandise, extra modern that remedy issues, discount in packaging so it prices much less, all these destructive and constructive impacts.

Meb:

So so far as portfolio building, you get down to those small group of names, 25 whatnot. Do you’ve gotten some form of sector composition display so it’s not all 25 in MedTech for instance, or how do you guys do any form of place sizing on this closing portfolio?

Liz:

Yeah, so they’re equal weighted, so we take away the place measurement decision-making. My dad all the time mentioned it was so that you didn’t have a bunch of PMs preventing over place measurement. We run a correlation evaluation, but it surely’s sector agnostic. We used to personal McDonald’s and KFC in my dad’s technique. And folks would say, “Aren’t they the identical firm?” And whenever you have a look at the geographic income of them, they have been fully reverse. And identical factor, there’s a number of corporations that look very comparable and appear very comparable on this massive cap area that aren’t essentially.

So whenever you have a look at our portfolio, we obtained an entire bunch of comparable stuff in there. And that’s the character of 1, we’re being actually selective. Two, we’re kicking out an entire bunch of stuff, however we undoubtedly don’t care about what the weights of the index are at any level in our choice making.

And we all know we’re going to be chubby tech and industrials and normally supplies and each client issues relying on. However we’re agnostic to that. And these are equal weight bets, so we’re placing the identical weight on a mega cap as we might be on a small cap within the portfolio.

After which that’s a part of the lively share. We’re okay not holding the highest 30 one thing % of the index. We’ve not one of the faux shares. You possibly can’t have excessive lively share in the event you’re holding a bunch of these corporations. And everyone else, I imply everyone’s going to have these of their portfolio anyhow. However it’s actually, we’re searching for the 25 most responsibly rising corporations out of that 50-ish set of corporations that we have now. It turns into our bench too. So the following set of ranked corporations in there are who will use when we have to fireplace an organization, whether or not it’s for quarterly earnings or doing one thing silly on the ESG aspect or the non-ESG aspect.

However once more, a whole lot of our stuff is annual knowledge. Whereas annual reporting and reviews come out midyear and issues like that, a whole lot of our board range adjustments once they change someone on a board, and we have now fired an organization for going under our threshold, however you’ll be able to think about the businesses that we’re holding are very cognizant of not, in the event you’ve obtained 76% board range, in fact you’ll be able to put an entire bunch of white dudes in your board, however in the event you obtained 31 and each investor that exhibits up is partaking with you in your board range or one thing, you’re going to be cognizant of it.

And that’s what’s so humorous about ESG. The entire world tries in charge BlackRock and the funding trade on ESG. They’re the laggards on this. The pensions for essentially the most half do a whole lot of the engagement round and plenty of managers to be tremendous clear, ESG managers do a whole lot of pushing on range and environmental stuff and governance and all these sorts of issues, but it surely’s the businesses themselves who notice that it’s a advertising and marketing profit, it’s a recruiting profit. It’s their large 4 accountants saying that they’ll audit this knowledge and serving to them set up it. It’s the firms driving ESG. It’s not BlackRock driving ESG. It’s not … undoubtedly not Vanguard driving ESG stuff. Actually Vanguard is simply being referred to as into congress for pushing local weather change narrative, which is the funniest factor in the complete world for a passive store.

The oil sands corporations up right here in Canada are working, doing much more work than most asset managers on range and lowering their emissions. Why? As a result of they’ve an entire bunch of buyers who care they usually could possibly be foundations, pensions, people who care about progress on these things and workers who care about progress on these things.

Meb:

Give us a behind-the-scenes have a look at what it’s like to start out an ETF. We get this query loads. Lots of people see the pot of gold on the finish of the rainbow. There’s clearly a whole lot of work that goes into it and also you guys are comparatively new launch, so congratulations. However inform us slightly bit concerning the expertise, the way it’s been, have you ever made it right down to Puerto Rico but? What’s the general agony and ecstasy of being not solely a founder however a cash supervisor and now a ETF issuer as properly?

Liz:

And a wholesaler and a marketer and all that sort of stuff. I feel it’s fascinating that folks suppose ETFs are like concepts. I feel there’s a lot room for innovation on this trade. I feel it’s going to look completely-ish totally different in 20 years, however I feel there’s some stuff that isn’t going to alter.

I feel there’s all the time going to be public markets buyers and personal markets buyers and people who do each. I feel individuals are all the time going to suppose geographically when it comes to allocation in sure issues. I feel there’s definitely a spot for thematics. Whenever you launch a product, it doesn’t matter what it’s, this SMA mannequin, ETF fund index ’trigger that’s an entire attention-grabbing aspect of the enterprise, it’s important to know who’s going to purchase it regardless of how cool the concept is, and it’s important to know the way it’s going to get distributed.

The great factor with an ETF automobile is individuals can purchase it, common individuals can purchase it, and advisors can purchase it in a bunch of locations, however there’s an entire bunch of restrictions and issues. They make issues extra difficult than simply launching an ETF. Just like the crypto ones, for instance, you most likely are associates with all Eric Balchunas and all of the crypto-obsessed ETF of us, they usually’re going to regardless of the spot Bitcoin ETF goes to launch. Effectively, many of the warehouse cabinets are locked within the US.

Apparently up in Canada, not one of the warehouses locked their cabinets to Canadian or US listed ETFs. So any advisor in Canada can purchase any ETFs besides the crypto ones. The large banks up right here has put a particular ruling on crypto ETFs, they usually principally mentioned to advisors, you can’t purchase them. You possibly can solely purchase them in case your shopper indicators an enormous waiver and it will get a excessive danger ranking of their portfolio.

So despite the fact that these are presumably the best, most talked about ETFs in the complete, total world, an entire bunch of Merrill Lynch and UBS and Citi of us usually are not going to have the ability to purchase them of their accounts anytime quickly as a result of they’re going to must get authorized, they’ll most likely create inner ones in order that they’ll, ’trigger there’s a pay to play side there too, that folk want to grasp. You may get your ETF on Schwab or no matter for free-ish. Getting your ETF on US platforms requires time and cash and a bunch of random stuff.

So this crypto one’s actually attention-grabbing ’trigger these ought to be, there’s going to be like, I don’t know, what number of are there? 18 now, all the large asset managers, they usually’re going to observe and a few of them are going to get on some platforms, however an entire bunch of them are going to get locked off a bunch of platforms. So despite the fact that it looks like an ETF is a magic bullet when it comes to wrapper for these merchandise, there’s an entire bunch of different concerns.

In order that’s simply my rant to inform everyone that your product thought is nice. Who’s going to purchase your product and the way they entry it’s most likely greater than 50% of the consideration that it’s best to make earlier than spending an entire bunch of cash to launch an ETF.

For retail platforms, once I say retail platforms, I imply advisors utilizing platforms to handle their fashions, an ETF is changing into an more and more higher possibility than a mutual fund as a result of one, you’re normally going to cost it decrease. Two, they’re altering all of the charges and value constructions of how ETFs and funds and commerce prices and issues like that. And so that you see an enormous transfer in direction of arguably easier ETF fashions, and that’s why we didn’t go together with Wes ’trigger we love Wes. We went with Wes as a result of we undoubtedly weren’t going to do a mutual fund, and he has an excellent white label ETF platform and has demonstrated. I imply, I met Perth first and that’s how we met Wes. Perth is my hero.

Meb:

I do know. Effectively, I seen your dictator’s remark earlier, and so I mentioned that feels like someone we all know.

Liz:

And I simply suppose it’s so fascinating. Perth’s most likely certainly one of my favourite examples clearly, of constructing a profitable product. She knew there was a scarcity of rising market systematic merchandise that she knew there was none that excluded dictatorships and that there can be an entire host of advisors throughout the US who can be completely wonderful with their rising market slice of the pie to not embody Chinese language holdings or Russian holdings or Qatari holdings or no matter as a result of there’s sufficient rising markets corporations on the market to get the publicity. And yeah, you’re not going to seem like the index. However who cares? A lot of of us are searching for systematic or lively choices, not the entire index. We’re by no means going to persuade a bunch of passive of us to make use of this as a core possibility, even when we’re the very best on the earth. You possibly can’t change the buyer conduct.

So Perth actually constructed a product to resolve the tip person’s wants. And I imply, she obtained an incredible timing with the Russian invasion, however she was already doing the work of discovering the market match and getting groups to construct her into the mannequin lengthy earlier than that occurred. And so everyone ought to simply go be taught every thing about Perth as a result of if you wish to launch an ETF, actually simply go watch all Perth’s movies.

Meb:

Perth has been on the present. She’s an alum. She, listeners, runs the Freedom ETF, FRDM, which is closing in on a billion {dollars} in belongings. So go Perth. That’s rad.

Liz:

Perth is superb. She’s simply the right instance of you’ll want to discover who’s going to purchase your nice thought earlier than going and determining the best way to make your nice thought. And possibly you have been an advisor, possibly you labored as a wholesaler, possibly you labored someplace within the distribution of the trade, however particularly in the event you’re a pure portfolio supervisor otherwise you’re outdoors of the trade, do some work on who and why and who’s shopping for this product and the place are they going to place it, since you want a few of these fundamental solutions earlier than you make a bunch of choices which can be going to price you cash that you just’re going to want to go change.

The way in which to launch an ETF is to have an entire bunch of cash and be prepared to spend it, I feel is one of the simplest ways. Launching a automobile, whether or not you’re BlackRock or a startup, is a little bit of a coin toss.

I used to be speaking to my buddy who works at a pretty big asset supervisor, and he was like, “Yeah, any new fund we have now, we spend the entire time worrying about who’s going to be the primary 20 million in.” So you bought to go discover sort of the place that first 20 million is, after which it’s by no means going to come back as quick as you need it to come back, and that’s why you’ll want to have cash. But it surely actually is, you have a look at the record of … any record of ETFs and also you go to the underside ones. And it’s not identical to 30 little startup corporations you’ve by no means heard of. It’s actually 90% large asset managers who’ve obtained autos from 2 to $10 million.

I really like telling of us, Cathie Wooden launched an ESG ETF in, I don’t know, 2000 after which closed it 18 months later ’trigger she couldn’t increase cash in ESG ETFs. So actually you possibly can be essentially the most well-known human being on earth. You continue to want to seek out the distribution connection between the product that you just’re wrapping and the necessity, after which you’ll want to not screw up the efficiency and all that sort of stuff.

Meb:

In the case of, you’ve obtained a whole lot of totally different takes on this area, however one of many questions we’ve been asking many of the company is, in the event you sit right down to espresso or lunch with a bunch of advisors which can be form of in your world, what’s a perception you maintain that say in the event you sat on the desk, 75% of the attendees would shake their head and say, “Liz, I disagree with you,” on funding associated, portfolio associated, ESG, DEI associated, something come to thoughts?

Liz:

Yeah, loads. I might go two instructions right here, so …

Meb:

Identify them each. Do each of them. We obtained time.

Liz:

So I don’t consider you’ll be able to predict the market. As someone who was raised in a really evidence-based quantum psychological store the place we did no predicting of the market, it’s fascinating to see this entire ecosystem of parents yelling about shares all day, daily and guessing the place macro goes to go and all this stuff. I don’t suppose it’s 75% of parents don’t consider in market. And to be tremendous good it’s predicting the timing of the market too.

I feel there’s danger in timing. I feel all of the research recommend that the timing danger of lively safety choice is likely one of the largest issues. That’s why we’re macro agnostic. We’re every thing apart from responsibly rising agnostics regardless of the fixed barrage on Twitter or CNBC or wherever. This concept that folks simply sit on TV yelling about future numbers and what they’re going to foretell pushes cool, certified math expertise individuals away from the trade. In order that’s my common take.

My ESG take, and I hear this loads, is ESG knowledge is just not standardized and may’t be standardized. And whenever you have a look at the businesses that we maintain within the portfolio, greater than half the portfolio has externally assured environmental knowledge. And so not solely is it standardized, not solely are they reporting by way of the identical framework. They’re getting exterior auditors to assessment their emissions knowledge and a bunch of their environmental knowledge. And the Division of Labor is reviewing their range knowledge.

Whereas 5 years in the past for positive, it undoubtedly regarded like stuff was not standardized when it comes to ESG knowledge, all the businesses we’re taking a look at have moved in direction of this. It’s referred to as the GRI template. There’s like a billion totally different frameworks in ESG, however in the event you go into any massive cap sustainability report, apart from a Tesla or all the parents who refuse to report fundamental ESG stuff, which is a really small group now, the overwhelming majority, most likely like 400 of the S&P 500 corporations are reporting this framework. Are they reporting year-over-year? No. You possibly can return to their earlier report and a few are laggards and a few are forward, however we’re ready to have a look at three 12 months knowledge for many of those metrics for many of our corporations.

Meb:

As you look again in your profession, what’s been essentially the most memorable funding? Good, unhealthy, in between?

Liz:

In all probability beginning the agency, however I’m going to say this ETF principally as a result of it’s public. I imply, whenever you’re working in separate accounts, we might share stuff with what we’re doing, however now it’s like, hey, we’re on the market. Efficiency has been fairly good since we began, which is a coin toss to be tremendous clear. We identical to the product. We just like the branding. We like Wes. We just like the US market. It’s nice. There’s so many alternatives. I imply, Canada’s nice too, to be tremendous clear, however we love what number of of you there are, 10 occasions as many people. There’s random 4 billion RIAs in the midst of states that no person’s ever heard of, which might be the twelfth largest RIA or asset wealth store in Canada.

And so I obtained to say, our ETF BEEZ is my favourite funding. We don’t love our corporations one after the other. We consider them as a crew. We’re fielding a crew of gamers. I imply, we don’t play favorites. We simply need to decide a great crew. So it’s, I’ll by no means reply a single safety as being a great funding or my favourite ’trigger once more, that’s simply not how we strategy portfolio building.

Meb:

Proper on. The place do individuals discover out extra data? The place do they go? Comply with you, comply with the agency, the fund, all that.

Liz:

So we have now an ETF web site, which is honeytreeinvestetfs, which is all that formal one. After which we have now honeytreeinvest.com, which is our common one which has tons of blogs. When you simply google Honeytree Funding or Honeytree ETF, you’ll see a number of articles and podcasts and issues like that.

I, regardless of Twitter or no matter of us need to name it present shit present, I’m nonetheless on there. I’ll be on there till it goes down for a wide range of totally different causes. ‘Trigger I really like the neighborhood and there’s a number of nice of us there, and it’s how we met Wes and all this stuff. So Liz Simmie on Twitter, if you would like obnoxious, occasional ESG takes. I principally simply rant about how BlackRock is just not woke and other people shouldn’t be satisfied that any asset supervisor is woke. That’s us in a nutshell.

And naturally you’ll be able to go by B-E-E-Z on choose custody platforms within the US. When you’re a retail investor, it’s most likely even simpler to entry than an advisor, however in fact, we’re primarily targeted on advisors on this. So in the event you’re an advisor fascinated with ESG and is aware of nothing about it otherwise you’re a deep ESG practitioner, please be at liberty to succeed in out to us on our web site ’trigger that’s who we’re trying to join with.

Meb:

Liz, thanks a lot for becoming a member of us immediately.

Liz:

Thanks for having me.

Meb:

Podcast listeners we’ll put up present notes to immediately’s dialog at mebfaber.com/podcast. When you love the present, in the event you hate it, shoot us suggestions at suggestions@themebfabershow.com. We like to learn the evaluations. Please assessment us on iTunes and subscribe the present anyplace good podcasts are discovered. Thanks for listening, associates, and good investing.



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